Sun, Nov 02, 2003 - Page 11 News List

Japan stays cautious on expansion

NY TIMES NEWS SERVICE , TOKYO

A department store chief, left, gives a speech to his sales clerks to open the year-end gift center at a department store in Tokyo, yesterday. The department store chain with 18 branches has started to receive gift orders for ''O-seibo'' or end-of-the-year gifts, aiming to make more than ?12 billion (US$111 million) in sales. Gift exchanges ahead of the New Year's holidays are one of the two major gift-giving seasons in Japan, driving the economy to the tune of billions of yen per year.

PHOTO: AFP

The Bank of Japan indicated Friday that it expected the economy to continue expanding next year, but it also signaled that it had no plans to raise interest rates.

In its twice-yearly outlook, the central bank's monetary policy board said that it expected Japan's US$4.6 trillion economy to expand 2.5 percent, and consumer prices to fall 0.3 percent in the fiscal year beginning in April next year.

The forecasts, which were more upbeat than many private-sector projections, suggested that the bank believed that the economy was out of immediate danger.

Still, in forecasting another year of deflation, the central bank implicitly conveyed that it had no plans to abandon its policy of pushing short-term interest rates to near zero.

Policy board members have said that raising interest rates prematurely could damage banks, which are struggling to write off trillions of yen in bad loans.

The government also wants the central bank to maintain its current policy to help limit interest payments on the growing public debt. Any sustainable rise in long-term interest rates would force the government to issue yet more bonds to pay off investors.

Policymakers are also eager to cap the yen's recent surge against the dollar, which erodes the profits of exporters.

Typically, central bankers begin considering how to raise interest rates when their economies are recovering. But with Japan's government and banks heavily reliant on rock-bottom interest rates, the central bank governor, Toshihiko Fukui, must walk a fine line in trying to foster growth, end deflation and help the banks clean up their balance sheets.

To that end, Fukui expressed only "cautious optimism" about the economy, which the board said would benefit from growing exports and capital spending. He also tried to dispel growing expectations, kindled after Japan's economy grew 3.9 percent in the April to June quarter, that the bank would raise rates next year.

"The central bank's GDP forecasts were optimistic, but the financial system cannot withstand a hike in interest rates," said Kazuhiko Ogata, an economist at HSBC Securities in Tokyo. "The bank made its message clear: There will be no change in policy next year."

The central bank's board also left monetary policy unchanged on Friday at the end of a one-day meeting. The bank will continue to buy ¥1.2 trillion (US$11 billion) in government bonds each month and make as much as ¥32 trillion available for banks to borrow.

Fresh economic figures released by the government on Friday underscored the central bank's caution.

The jobless rate remained at 5.1 percent in September, but household spending in September fell a worse-than-expected 0.9 percent from August. Construction orders also dipped 4.4 percent in September from the month last year.

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